The opinion of the court was delivered by: John F. Keenan, United States District Judge
Plaintiff Grand River Enterprises Six Nations, Ltd. ("Grand River") moves for a preliminary injunction barring defendants from (1) enforcing their states' so-called "Allocable Share Statutes," (2) denying Grand River's application to become a party to the Master Settlement Agreement ("MSA") between the states and certain participating cigarette manufacturers, and (3) banning sales in their states of Grand River-produced cigarettes.
On April 13, 2006, Grand River moved by ex parte order to show cause for a temporary restraining order pending a hearing on the instant motion. After a hearing that day, the Court declined to issue the restraining order. The Court heard the oral arguments of counsel on April 21, 2006 and witness testimony on April 25, 26 and May 1, 2006. The parties submitted proposed findings on May 12, 2006. For the reasons that follow, Grand River's motion is denied in its entirety.
The testifying witnesses were Messrs. Larry Phillips, Marvin Wesley and Jerry Montour. Mr. Phillips is the president of Tobaccoville, USA, Inc. ("Tobaccoville"), located in South Carolina. (Tr. 2; Philips Decl.)*fn1 Tobaccoville imports cigarettes from Grand River. (Tr. 3.) Mr. Wesley is an independent sales representative for Tobaccoville whose territory includes Kansas and about one-third of Oklahoma. (Tr. 84, 96-97.) Mr. Montour, a member of the Mohawk tribe, is the CEO of Grand River. He has residences on the Tamarac Reservation and in the city of South Hamilton, both of which are located in the Province of Ontario, Canada. (Tr. 113.)
1. The Master Settlement Agreement
In November 1998, the attorneys general of 46 states, the District of Columbia, the Commonwealth of Puerto Rico and four territories (the "Settling States") entered into a Master Settlement Agreement ("MSA") with the four largest domestic cigarette manufacturers. These manufacturers, known as Original Participating Manufacturers ("OPMs") promised to, inter alia: (1) make per-cigarette payments in perpetuity, (2) fund a national foundation devoted to educating the public about the dangers of tobacco use and (3) adhere to restrictions on their advertising, marketing and other practices. In return, the Settling States released certain past, present and future claims against the OPMs. Other cigarette manufacturers may join the MSA as Subsequent Participating Manufacturers ("SPMs"). SPMs also must make annual per-cigarette payments to the Settling States and adhere to the same advertising, marketing, and other restrictions as the OPMs. (MSA §§ II, III, VI, IX.)*fn2
Companies that do not participate in the MSA are called Non-Participating Manufacturers ("NPMs"). (MSA § II.) The MSA, however, contains provisions that give the Settling States incentives to enact "Escrow Statutes" directed at NPMs (MSA § VIII(d)(2), Ex. T.) A typical Escrow Statute, inter alia, requires each NPM whose cigarettes are sold in that state to deposit a statutory per-cigarette amount into an escrow account established by the NPM. See, e.g., N.Y. Pub. Health Law § 1399-pp(2)(a) (McKinney's Supp. 2005). The NPM retains title to the funds and keeps all interest as earned. Id. § 1399-pp(2)(b).
2. Release of Escrow Funds
All of the Settling States have enacted Escrow Statutes. (Hering Decl. ¶ 17.) Funds remain in escrow for 25 years, at which point they are released and revert to the NPM. N.Y. Pub. Health Law § 1399-pp(2)(b)(iii). The primary purpose of the escrow requirement is to create a resource available to the States in the event they sue and obtain a judgment or settlement against an NPM for damages arising out the NPM's cigarette sales in the state. See N.Y. Pub. Health Law § 1399-nn(4) (McKinney's 2002). Accordingly, the Escrow Statutes permit an early release of escrowed funds for satisfaction of such judgments or settlements. Id. § 1399-pp(2)(b)(i) (McKinney's Supp. 2005). As originally enacted, the Escrow Statutes permitted an early release in one other situation. Under the so-called "Allocable Share Provision," an NPM was entitled to an early release of funds to the extent that its escrow payments for a given year exceeded the State's Allocable Share of the payments that the NPM would have made under the MSA, had the NPM been an SPM. Id. § 1399-pp(2)(b)(ii) (McKinney's 2002).*fn3 Certain NPMs exploited the Allocable Share Provision by concentrating their sales in a small number of states. The result was the release of almost all of their escrowed funds. (Hering Decl. ¶ 13.) Grand River employed this business strategy. (Violi Emerg. Decl. ¶ 10.)
Not all cigarettes sold within Settling States trigger an escrow obligation. For example, most cigarettes sold on Native American reservations are exempt from escrow payments. Escrow Statutes require payments on "units sold." "Units sold" in a given state are measured by the number of cigarettes in packs bearing a state excise tax stamp. See, e.g., N.Y. Pub. Health Law § 1399-oo(10). On Native American reservations, packs typically are sold without state excise tax stamps. (Tr. 257.)
3. The Allocable Share Amendment
All of the Settling States (except Missouri) reacted to the large escrow releases by amending their Allocable Share Provisions. (Hering Decl. ¶ 17.) The new "Allocable Share Amendment" entitles the NPM to a release of escrow funds only to the extent that its escrow payments in a given state exceed what the NPM would have owed to all states under the MSA, if the NPM had been an SPM. See, e.g., N.Y. Pub. Health Law § 1399-pp(2)(b)(ii) (McKinney's Supp. 2005). An NPM's escrow obligation now is calculated solely by reference to sales within a Settling State, with no consideration given to the State's Allocable Share. (Tr. 253.) Under the new law, NPMs will not receive large escrow refunds even if they concentrate their sales in a small number of States. (Williams Decl. ¶ 14-15.)
The failure to make escrow payments is punishable pursuant to a State's "Certification Statute." All of the Settling States whose attorneys general are parties to this action have enacted a Certification Statute. (Hering Decl. ¶ 20.) In New York, for example, an NPM must certify annually that it is in compliance with the Escrow Statute. If the NPM does not so certify, it must make the payment within fifteen days. Failure to do so could result in court-imposed civil penalties of a certain percentage of the shortfall. After subsequent knowing violations, the court may ban the manufacturer from selling cigarettes in the state for up to two years. See N.Y. Pub. Health Law § 1399-pp(2)(c).
Under newly enacted "Contraband Statutes," the State tax commissioner has authority to impose a civil penalty of up to $5000 against an NPM that violates the Escrow Statute. See N.Y. Tax Law. §§ 480-b(2); 481(c). If the commissioner finds the NPM in violation of the Escrow Statute, he may prevent the NPM's cigarettes from obtaining a state cigarette tax stamp. Id. § 480-b(2). He also may seek to suspend or cancel any license issued to an NPM. Id. § 481-c. Grand River contends that the Contraband Statutes give the attorneys general unilateral authority to ban sales of cigarettes in their States without recourse to the courts. (Grand River Prop. Finding of Fact # 16.)
Grand River is a Canadian-incorporated NPM. It is owned by First Nations members of the Iroquois Confederacy. (Williams Decl. ¶ 2.) Grand River's principal place of business is on the Six Nations Reservation in Oshweken, Ontario. (Tr. 116.) Grand River manufactures cigarettes for sale in Canada, the United States and other countries including Germany, Denmark, Switzerland, Sweden, Vietnam and some African nations. (Tr. 197-98). Grand River currently is the fourth largest cigarette manufacturer in Canada. (Tr. 195.)
Grand River sells cigarettes to two companies for distribution in the United States: Native Wholesale Supply Company ("Native") and Tobaccoville (Tr. 196.) Native sells Grand River cigarettes exclusively on Native American reservations in the United States. (Tr. 197.) As stated, Grand River incurs no escrow obligation from these sales. (Tr. 257.) In 2005, Grand River sold approximately 1.6 billion cigarettes to Native. (Tr. 196-97.) Tobaccoville sells the rest of Grand River's cigarettes in seven Settling States: North Carolina, South Carolina, Georgia, Tennessee, Oklahoma, Arkansas and Kansas. (Tr. 56.) These sales totaled 3.6 billion cigarettes in 2005, nearly a fifty-fold increase over ...